Equity Residential (EQR) and AvalonBay Communities Inc. (AVB) are acquiring Archstone Enterprise LP, a portfolio of apartment properties, from Lehman Brothers Holdings Inc. for a total of around $6.5 billion in cash and stock.
Under the terms of the deal, Equity Residential, the country's largest apartment developer and manager, will acquire around 60% of Archstone's assets and liabilities, while AvalonBay will acquire roughly 40%. The deal is expected to close in the first quarter of 2013.
The combined purchase price includes $2.7 billion in cash and a fixed number of Equity Residential and AvalonBay shares valued at $3.8 billion at Friday's close.
The deal also includes the assumption of $9.5 billion of debt and $330 million in preferred equity. Fannie Mae and Freddie Mac currently hold around $8.6 billion of the debt that will be assumed in the deal.
The deal follows Lehman's move earlier this year to buy the remaining 53.6% stake in Archstone it didn't already own from Bank of America Corp. (BAC) and Barclays PLC (BCS, BARC.LN). Equity Residential, chaired by real-estate investor Sam Zell, made a bid last year to buy a portion of the apartment giant. At the time, Lehman didn't want to share control of Archstone, kicking off a high-stakes battle for the apartment portfolio.
"The sale of Archstone to Equity Residential and AvalonBay is a very positive outcome for our creditors," said Owen Thomas, chairman of Lehman's board. "The transaction delivers significant return on the investment we made earlier this year to fully control Archstone and has generated immediate and considerable proceeds for our next distribution to creditors."
Most of the 78 properties that Equity Residential plans to acquire are in relatively high-rent markets, including Washington, D.C.; San Francisco; Southern California; and New York. They include 23,100 units with an average monthly rate of $2,492.
Equity Residential plans to issue 34.5 million shares to help fund the deal. The real-estate investment trust also intends to use the proceeds from past asset sales in Atlanta; Orlando, Fla.; Phoenix; and Jacksonville, Fla. and from future sales of noncore assets.
The deal is expected to reduce Equity Residential's 2013 adjusted funds from operations--a key metric of profit in the real-estate sector--by as much as four cents a share.
AvalonBay will acquire 66 apartment properties in the mid-Atlantic, Southern California, Northern California and other markets, including 22,222 units.
"This acquisition accelerates our strategic growth vision of more deeply penetrating our core, high barrier-to-entry coastal markets," said AvalonBay Chief Executive Tim Naughton.
AvalonBay also said it expects to increase its dividend in the first quarter of 2013 by between 8% and 12%, citing the Archstone acquisition and the expectation of improving apartment fundamentals in 2013. The REIT said it plans to offer 14.5 million shares in order to help fund the acquisition.
If Equity Residential and AvalonBay don't satisfy closing conditions, they will be liable to pay Archstone as much as $800 million.
Equity Residential shares were off 1.5% in after-hours trading to $53.61, while AvalonBay shares were down 1.2% to $127.35 in late trading.
